Economists warn of inflation if minimum wage hiked

This article first appeared in The Edge Financial Daily, on October 16, 2017.
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KUALA LUMPUR: Economists warn of a rise in inflation — and perhaps even more unemployment — in the event of an increase in the minimum wage next year, but they also see the benefit of helping the country’s lowest paid workers and creating a more inclusive economy.

“If there is a minimum wage increase next year, it would likely result in a cost-push inflation as businesses are likely to pass on the rising costs to consumers,” said Peck Boon Soon, chief Asean economist at RHB Research Institute Sdn Bhd.

“It would also contribute to demand-pull inflation at the back of income growth. The increase in minimum wage will cascade up to other income groups and higher wage across the economy,” Peck said in an email exchange with The Edge Financial Daily.

He added, however, that a rise in the minimum wage is positive for the economy in general as it would help ensure a more inclusive economic growth in the country and boost overall consumer spending and economic growth.

Human Resources Minister Datuk Seri Dr Richard Riot Jaem said last Thursday that a new minimum wage will be announced next year, with the main focus being to close the gap between the rate in Peninsular Malaysia and Sabah/Sarawak.

The minimum wage was raised to RM1,000 from RM900 in Peninsular Malaysia, and to RM920 from RM800 in Sabah and Sarawak, with effect from July 2016.

Pointing out that the Minimum Wage Order must be reviewed at least once in two years, Riot said the National Wages Consultative Council has started making plans to carry out the review aimed at allowing the government to determine a rate that is in line with the country’s current socio-economic development.

A wage hike will be a further blow to employers who are already unhappy with the revision of the levy on foreign workers not long ago and now followed by the introduction of the Employment Insurance Scheme.

Pong Teng Siew, head of research at Inter-Pacific Securities Sdn Bhd, said manufacturers should start moving to higher value-added jobs.

“We will see another round of inflationary pressure [if minimum wage is raised], but it’s crucial to move Malaysia out of the low-wage industries,” Pong said.

“We need to move to higher value products and services. The increase in minimum wage will force manufacturers to seek out for higher value-added jobs and activities rather than the low value-added [jobs], high volume output,” he added.

While he believes that there will be some dislocations along the way to push forward this agenda to move into a higher position in the global value chain, it is vital as Malaysian companies have been stuck at low value-added manufacturing for a long time.

Unlike Taiwan and South Korea which have moved up the ladder to high-end manufacturing in the last 10 to 20 years, Malaysia only has the world’s largest rubber glove manufacturer to boast.

United Overseas Bank (M) Bhd economist Julia Goh said a hike in the minimum wage would help create a more inclusive economy.

“If you look at it, this will help the lowest income group of people, which is important given how the rising cost of living has affected these lower income earners more,” Goh said in a telephone interview.

Noting that the minimum wage-earning workers in Malaysia are largely made up of foreigners, she said an increase in the wage rate could spur Malaysians to take on more of these jobs, and thereby help reduce unemployment in the country.

Dr Yeah Kim Leng, economics professor at the Sunway University Business School, is positive that businesses are capable of absorbing higher wages given the expansion in the economy.

“Businesses are likely to be able to absorb the rising costs. The economy is expanding, we are in high position to absorb higher wages,” Yeah said.

He pointed that a hike in minimum wages paid to workers in low-skilled jobs would give rise to ripple effects in the labour market, as other employers may face the pressure to offer higher pay.

Institute of Democracy and Economic Affairs chief executive officer Wan Saiful Wan Jan, however, thinks that an increase in minimum wage would only have a small impact on overall inflation.

He added that it would be inaccurate to say that a higher minimum wage would lead to a higher cost of living for the middle-income group.

“The bigger worry should be the higher cost of doing business created by a hike in minimum wage because this may deter investment and have a negative impact on growth,” Wan Saiful said.

He also shared that while the minimum wage is a politically popular measure, the long-term implications such as unemployment could be bad for the lower-income group.

“Minimum wage is politically popular but has its pros and cons. While some people may benefit, others may lose their jobs as employers mechanise to reduce costs due to [a] higher minimum wage. So, we must [have a] balance in looking at this policy. It is not all good,” he said.

He warned that while a minimum wage hike would be of great benefit for the lower-income group during the current challenging time, the long-term impact would be bad as more lower level workers may lose their jobs.

“A hike will add to the costs of doing business, which may mean more people in the lowest strata losing their jobs,” Wan Saiful said, adding that an increase in wages should come only after there is an increase in the productivity level.

RHB Research’s Peck agreed with Wan Saiful on the downside of raising the minimum wage, although he is of the view that a rise will overall be positive for the economy.

“The downside will be [a] higher cost of doing business if productivity does not increase in tandem, making our industries less competitive,” said Peck.